Monday, June 18, 2012

Schnell, Frau Merkel?

Euro zone paymaster Germany, relieved at a narrow election victory for Greece's pro-bailout parties, signaled on Monday it may be willing to grant Athens more time to meet its fiscal targets to avert a catastrophic euro exit.

But financial markets' relief that the 17-nation European currency area had avoided plunging deeper into crisis was mitigated by concern about unresolved problems in Greece, the lack of a comprehensive plan for the euro zone as a whole and weakness in the world economy.

German Foreign Minister Guido Westerwelle said the substance of Greece's austerity and economic reform program, agreed in exchange for a second EU/IMF rescue, was non-negotiable, but the timing could be adjusted.

"We're ready to talk about the timeframe as we can't ignore the lost weeks and we don't want people to suffer because of that," Westerwelle said in a radio interview.

Government officials said his comments did not reflect Berlin's official position, and a government spokesman said now was not the time to give Greece "a discount".

However, Deputy Finance Minister Steffen Kampeter, who is closer to Chancellor Angela Merkel and normally a stickler for strict adherence to fiscal orthodoxy, told ARD television: "It is clear to us that Greece should not be over-strained."

Austrian Chancellor Werner Faymann said Greece needed both a sustainable course of fiscal consolidation and a return to economic growth after four years of crippling recession.

"The conditions that were negotiated have to be observed but we also need to give the Greeks room to breathe," Faymann said in a statement. "For example it must be assured that people have sufficient access to medicine. Consolidation cannot be carried out solely on the backs of the people."

The hints at leniency should help Greek conservative leader Antonis Samaras, whose New Democracy party narrowly outpolled the radical leftist anti-austerity SYRIZA movement in Sunday's election, to form a mainstream coalition with the centre-left Pasok Socialists.

He will face fierce pressure from European and International Monetary Fund lenders to start implementing seriously an economic reform program agreed earlier this year, which has largely remained a dead letter so far.

TRUST BUST

With trust in Greek politicians at a low ebb, a senior EU official said the new government would find a 100-day action plan on its desk including privatizations, axing public sector jobs and closing loss-making enterprises to prove it was serious.

"There will be a very clear 100-day plan for a new government. If it's not implemented in full then the game is over," the German EU official told Reuters before the election.

Procedurally, the next step after the formation of a government will be for the "troika" of European Commission, IMF and European Central Bank inspectors to return to Athens to review Greek implementation of the bailout agreement.

The euro and shares rallied briefly after the Greek vote, but there was no let-up for the borrowing costs of euro zone strugglers Spain and Italy.

Italian Prime Minister Mario Monti welcomed the Greek election result, telling reporters in Mexico on arriving for a G20 summit: "This allows us to have a more serene vision for the future of the European Union and for the euro zone."

Spanish Prime Minister Mariano Rajoy called the outcome "good news for Greece, very good news for the European Union, for the euro and also for Spain".

But Spanish and Italian 10-year government bond yields rose, with Spain's hitting a fresh euro era record above 7.1 percent, close to levels that drove Greece, Ireland and Portugal to seek international rescues.

Analysts at Citi said the election had changed nothing fundamental and they still forecast a 50 to 75 percent likelihood of Greece leaving the euro within 12 to 18 months.

Others said that regardless of whether Greece stays or goes, the key issues driving markets are whether the world's central banks will do more to revive global growth, and whether euro zone leaders can sketch out a roadmap for closer fiscal and banking union at a summit next week to convince investors that the euro will survive.

"It remains vital that eurozone governments take profound steps forward in terms of fiscal union and restoring confidence in the banking sector," said Nick Kounis of Dutch bank ABN AMRO.

"Judging by past form, European politicians tend to take their foot off the gas when the pressure is off."

AUSTERITY ISN'T WORKING

Samaras has pledged to renegotiate key elements of the 130 billion euro ($165 billion) bailout program to soften the economic impact.

Giving Athens an additional year to achieve its deficit reduction goals would mean increasing the size of the euro zone's bailout, raising the commitment by countries such as Germany, the Netherlands and Finland where voters are deeply reluctant to approve further funding.

Greece is in the fifth year of a crippling recession that has driven unemployment to a record 22 percent - including one in two young people - and caused widespread hardship.

Although sufficient voters cast their ballots out of fear of a disastrous euro exit to give mainstream parties a working majority, a majority of electors angry over austerity and corruption voted for a range of anti-bailout fringe groups.

That raises the prospect of a renewal of violent street protests if a Samaras-led administration moves ahead with the unpopular cuts and closures demanded by international lenders.

There is little sign so far that austerity is working in Greece. Public wage, pension and spending cuts have exacerbated economic contraction, shrinking revenue needed to service the debt mountain, while bureaucracy, corruption and a lack of confidence have held back private sector investment.

Many citizens in a fractured society have responded by sullenly refusing to pay bills and taxes out of disgust with their political leaders and fury at seeing the rich evading tax and parking money abroad.

Even if the economy began to recover, economists argue the demands being made of Greece to reduce its public debt to a sustainable trajectory are unrealistic.

If, as expected, the "troika" finds that Greece is off course, pressure among non-European states for the IMF to pull out of the program is bound to rise, diplomats said. The euro zone may end up carrying the whole cost of the bailout, which in turn could fuel public opposition in northern European creditor countries, they said.

Mindless austerity has been an disaster in Greece, Spain, Portugal, Italy and pretty much everywhere it's being pursued. No stranger to depression economics, Nobel-prize winning economist Paul Krugman opines, Greece as Victim:

Ever since Greece hit the skids, we’ve heard a lot about what’s wrong with everything Greek. Some of the accusations are true, some are false — but all of them are beside the point. Yes, there are big failings in Greece’s economy, its politics and no doubt its society. But those failings aren’t what caused the crisis that is tearing Greece apart, and threatens to spread across Europe.

No, the origins of this disaster lie farther north, in Brussels, Frankfurt and Berlin, where officials created a deeply — perhaps fatally — flawed monetary system, then compounded the problems of that system by substituting moralizing for analysis. And the solution to the crisis, if there is one, will have to come from the same places.

So, about those Greek failings: Greece does indeed have a lot of corruption and a lot of tax evasion, and the Greek government has had a habit of living beyond its means. Beyond that, Greek labor productivity is low by European standards — about 25 percent below the European Union average. It’s worth noting, however, that labor productivity in, say, Mississippi is similarly low by American standards — and by about the same margin.

On the other hand, many things you hear about Greece just aren’t true. The Greeks aren’t lazy — on the contrary, they work longer hours than almost anyone else in Europe, and much longer hours than the Germans in particular. Nor does Greece have a runaway welfare state, as conservatives like to claim; social expenditure as a percentage of G.D.P., the standard measure of the size of the welfare state, is substantially lower in Greece than in, say, Sweden or Germany, countries that have so far weathered the European crisis pretty well.

So how did Greece get into so much trouble? Blame the euro.

Fifteen years ago Greece was no paradise, but it wasn’t in crisis either. Unemployment was high but not catastrophic, and the nation more or less paid its way on world markets, earning enough from exports, tourism, shipping and other sources to more or less pay for its imports.

Then Greece joined the euro, and a terrible thing happened: people started believing that it was a safe place to invest. Foreign money poured into Greece, some but not all of it financing government deficits; the economy boomed; inflation rose; and Greece became increasingly uncompetitive. To be sure, the Greeks squandered much if not most of the money that came flooding in, but then so did everyone else who got caught up in the euro bubble.

And then the bubble burst, at which point the fundamental flaws in the whole euro system became all too apparent.

Ask yourself, why does the dollar area — also known as the United States of America — more or less work, without the kind of severe regional crises now afflicting Europe? The answer is that we have a strong central government, and the activities of this government in effect provide automatic bailouts to states that get in trouble.

Consider, for example, what would be happening to Florida right now, in the aftermath of its huge housing bubble, if the state had to come up with the money for Social Security and Medicare out of its own suddenly reduced revenues. Luckily for Florida, Washington rather than Tallahassee is picking up the tab, which means that Florida is in effect receiving a bailout on a scale no European nation could dream of.

Or consider an older example, the savings and loan crisis of the 1980s, which was largely a Texas affair. Taxpayers ended up paying a huge sum to clean up the mess — but the vast majority of those taxpayers were in states other than Texas. Again, the state received an automatic bailout on a scale inconceivable in modern Europe.

So Greece, although not without sin, is mainly in trouble thanks to the arrogance of European officials, mostly from richer countries, who convinced themselves that they could make a single currency work without a single government. And these same officials have made the situation even worse by insisting, in the teeth of the evidence, that all the currency’s troubles were caused by irresponsible behavior on the part of those Southern Europeans, and that everything would work out if only people were willing to suffer some more.

Which brings us to Sunday’s Greek election, which ended up settling nothing. The governing coalition may have managed to stay in power, although even that’s not clear (the junior partner in the coalition is threatening to defect). But the Greeks can’t solve this crisis anyway.

The only way the euro might — might — be saved is if the Germans and the European Central Bank realize that they’re the ones who need to change their behavior, spending more and, yes, accepting higher inflation. If not — well, Greece will basically go down in history as the victim of other people’s hubris.

I disagree with Krugman, blaming the euro for all of Greece's economic woes. Unlike me, Krugman hasn't traveled to Greece every year of his life, knows very little about the systemic corruption, grossly inefficient public sector and rampant tax evasion. Sure, Greeks in the private sector are the hardest workers in Europe but most in the public sector are sitting on their hands.

Krugman fails to even once mention all the benefits that came from being part of the eurozone, like being able to borrow at much cheaper rates (even though a lot of this was squandered) to finance much needed infrastructure projects. Also, the 'good old drachma days' were great for tourists, not so much for Greeks who had to live through one devaluation after another.

But Krugman is dead right that the only way the euro might be saved is if Germany gets its act together and starts implementing real long-term solutions to bolster the fiscal union. The Greek elections are over. You can read all sorts of opinions, like this one from Andreas Koutras, but the reality is that Greeks remain deeply divided and most people didn't bother voting out of sheer disgust for all parties (31% of Greeks didn't bother voting for these crucial elections -- tells you a lot).

It's now up to Frau Merkel and her northern European counterparts to step up to the plate. This is what the G20 is demanding, and this is what the world needs. No more political dithering, no more band-aid solutions and endless eurozone meetings where absolutely nothing gets done.

First it was Greece, then Ireland and Portugal. Then, punctually, came Spain’s turn. As far Italy is concerned . . . well, let’s knock on wood. Would it be even reasonable to affirm that Europe exists if we let the markets attack and unabashedly hit one country after another? The answer is no!

Since June 5, this publication has been publishing editorials by Europe’s founding fathers to remind everyone that the next summit, scheduled for the end of this month, cannot be the 25th meeting in a row where no decision is made. One quote alone by former German chancellor Helmut Schmidt perfectly describes the current situation: “The great Germany is losing its sense of history, of its European rehabilitation, and of solidarity with its partners.”

Ms. Merkel, you can’t go on like this. You will not go very far if you continue to be indifferent to the Greeks’ anger and distant from the Spaniards’ wounded pride, the Italians’ fears, the French’s anxieties. Taking out 100 billion euros (belonging to European citizens—Italians for the most part) to defend Spanish banks and find ourselves with the BTP-bund split at 473 points (return rate at 6 percent) and the Spanish bonos-bund one at 520 (return rate at 6.5 percent) is just the last red flag in a general alert that you continue to ignore. There are no alternate routes. We repeatedly said and wrote so. We must deliver a strong message to the markets: Europe exists, and it will continue to exist. Period.

The time for words is over: with a 10-year delay the European political integration design must be completed through concrete steps, which should be implemented immediately.

1. A unified warranty for European bank deposits. To those who raise (partly justified) moral issues about its introduction, we must explain that without this particular tool even those who behaved well run the risk of overpaying.

2. Direct access to the States Rescue Fund (European Financial Stability Facility, or EFSF) granted to credit institutions. This might seem like a detail, but it’s not. Yesterday’s turbulence in the markets were generated exactly by the idea that help will come from a second stability fund, the European Stability Mechanism, and not from EFSF. This has a direct impact on the quality, and risk factor, of Spanish national bonds.

3. Unification of southern European countries’ bond rates—and not only on southern ones—which so far has proved extremely costly. This last point is the most complicated one. It can be implemented only by exchanging common protection with constitutional reform in every single country involved. It will require giving up part of the national sovereignty and acquiring some European sovereignty sealed by a new and real constitution. To turn this idea into reality those at the helm of government in every single country (France and Germany included) must have the strength to convince their respective electorates of the short- and medium-term benefits of such a choice. It might look like a daring process—for sure not an easy one—however, it is almost an obligatory passage if we, the European states, don’t want to end up like those 10 little Indians in Agatha Christie’s novel.

This is needed right away. It is needed for Europe as well as for Germany. To knock down the economies of Europe—where 60 percent of its exports and most of its foreign assets are—is not in Germany’s interest. Mario Draghi pumped out liquidity like the ECB had never done before. And he is ready to do it again. However, he keeps repeating that “lifting the fog” should not be up to him. Mr. Draghi is right. It is up to Chancellor Merkel to recuperate the political strength of Europe’s founding fathers and bring Helmut Kohl’s design to completion. A strong and healthy Germany cannot possibly exist amid the ruins of European countries, large and small. The bill would be too high for all.

Ms. Merkel, accept the good proposals for growth by the U.S. and China while firmly rejecting their sympathies when driven by vested interest. Rediscover pride in leading the formation process of a new Europe, an area of ancient economic culture and history. Public debt in the euro area is equal to about 90 percent of its gross domestic product. In the United States the crisis of private debts in 2008 determined a public debt largely higher than its GDP. If Europe finds quickly its political unity it will be a fierce competitor for everyone and will be able to ensure income and employment for a new generation of its citizens

Otherwise, you will be overwhelmed by a spiral of defensive interventions that will jump from one country to another. Sure, they will buy us time, but eventually they will sentence us to decline. If you and your country want to remain the protagonists in Europe, there is no more time to waste. Score not one but at least two or three hits and score them fast so that it will be clear to all that the United States of Europe is indeed a reality and that the euro is no longer attackable. Schnell, Frau Merkel, hurry up!

As I stated in my weekend comment, the euro titanic has hit the iceberg and it's up to Berlin to convince Germans that it's in their interests to save the eurozone by abandoning mindless austerity, by focusing more on growth, and by creating a common banking union or eurobond market.

To be sure, reforms must be carried out in Greece, Spain, Italy and Portugal, but they cannot be carried out in a depression. Growth first, reforms later when their economies are on more solid footing. That has to be the agenda when eurozone leaders meet in Brussels at the end of the month.

As for markets, the news might be initially sold, but I'm cautiously optimistic and so are hedge funds which are raising their bullish commodity bets as mounting speculation that central banks will announce more economic stimulus.

Below, Bloomberg's Europe editor, David Tweed, on the effect Greece's election results will have on Europe, and how Europe is likely to react. And the two-day G-20 summit starting today kicks off a week of crisis meetings taking place after Spain this month became the fourth euro-region nation to seek a bailout amid the weakest global economy since the 2009 recession

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